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How a US Recession Would Affect Global Markets

by ETF Base on May 13, 2016

There have been a number of investors and economists in recent months claiming that there is a chance the USA could enter another recession sometime in the near future. Others believe the likelihood is much lower, but don’t rule out the possibility altogether.

If there was to be another recession for the USA it is unlikely to be as severe as the one in 2008. However, the impact of a recession in the USA would have a much wider reaching impact. As one of the world’s leading economic powerhouses it would affect all of the world’s financial markets and mean investors and traders need to change their strategy.

Stock Market

A US recession would affect not just the companies on the stock market but those investing in any of their stocks. When a country experiences a recession it results in a slowdown or stoppage of economic growth which affects the nation’s productivity.

The value of stocks almost always suffer in reaction to this. Unemployment increases as companies attempt to boost their margins, with other businesses spending less. Reduced stock prices results in a weaker market and disaster if some companies go bust. Due to the USA’s financial power a number of large US based companies would be at risk of dropping in value should there be another US recession.

Forex Market

When a recession occurs there is generally no set rule of what happens. For example, the British pound fell by around 20% in the recession that started in 2007, yet the US Dollar and Euro were largely unaffected.

That was a global recession however, and a solely US one could result in the Dollar’s value dropping. In reaction it would usually result in traders on the forex market backing a safe currency such as the Japanese Yen or Swiss Franc. Many would predict it to bounce back though, so it could provide a good investment opportunity for the future.

Precious Metals

Precious metals are a critical asset for a lot of investors and in many recessions have actually increased in value during the period of a recession. Even when they have dropped, it is worth holding onto as it is a bull market.

A lot of governments will try to tackle a recession through increased money printing, so having something more tangible to hold onto can be worthwhile. Therefore the precious metals market is unlikely to be affected by a US recession at all.